ECB’s Coene: Euro Level Not Problem Now but Danger Still Lurks

DAVOS, Switzerland–The euro’s level is not currently a problem but a global monetary policy “race to the bottom” could create a “very difficult situation,” said Luc Coene, member of the Belgian Central Bank and the European Central Bank Governing Council, on Friday.

Speaking on the sidelines of the World Economic Forum in Davos, Mr. Coene said improved financial market conditions were yet to lead to an uptick in the real economy but that there were signs this could soon happen. And he said there could be some “upside” growth for the Belgian and other European economies.

With the euro trading just shy of $1.35 Friday and close to an 11-month high against the dollar, Mr. Coene said that, “for the moment, there is not a problem.”

But he said if the Bank of Japan pursues aggressive monetary easing “this is bound to have consequences for exchange rates, and that could potentially lead to dangerous situations.”

“A race to the bottom is not in anyone’s interest,” he said of the risk that advanced economies will seek to boost growth through aggressive monetary easing leading to currency devaluation.

“It’s not in the interests of the Americans or in the interests of the Japanese or the British. I think we should really coordinate our actions in this area, otherwise we will really end up in a very difficult situation,” he said.

On monetary policy, Mr. Coene said interest rates are already “very low” and “we don’t see any need” for further monetary easing, whether that be a cut in the ECB’s 0.75% refi rate or more unconventional steps such as making the ECB’s zero deposit rate negative.

He also said there is no discussion right now of trying to craft policy measures that could help improve the supply of credit in struggling economies such as Italy or Spain. He said the primary reason for weak lending data is a lack of demand.

Mr. Coene also welcomed the news Friday of repayments of significant long-term refinancing operations of the more than €1 trillion ($1.33 trillion) in cheap, three-year loans the ECB provided in late 2011 and early 2012.

He said the repayments were “slightly higher” than expected. And far from stigmatizing the banks that did not repay loans, Mr. Coene said, Friday’s news should boost market sentiment further and “may well” result in a further fall in yield spreads within the euro zone in coming days.

And while Mr. Coene stressed that the euro zone is “not yet out of” the crisis, he struck a note of optimism that the improvement in financial market conditions would feed through to better economic data both in Belgium and the rest of the region.

“I am certainly now a bit more optimistic that things are going to improve than a few months ago. I think we may be surprised maybe on the upside. But what is essential that policies stay on the right course and now that the situation is improving that there is no withdrawal from all the adjustment that needs to be made,” he said.

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Davos Live provides updates from the World Economic Forum’s annual talkfest in Davos, Switzerland, which draws more than 2,500 business, political and academic leaders for a five-day program of workshops and panel discussions. A team of reporters and editors from The Wall Street Journal and Dow Jones Newswires is on the scene, and will be posting news, commentary and gossip as the conference unfolds.